UPDATE - 7/7/20: The deadline for small businesses to apply for Paycheck Protection Program loans has been extended from June 30, 2020, to August 8, 2020. Additionally, the Treasury Dept. has released application forms for PPP loan forgiveness. Read the details here.
UPDATE - 6/5/20: The Paycheck Protection Program Flexibility Act was signed into law, making several changes to the PPP to give small businesses borrowers more flexibility. Updates to the program have been added below or can be read in detail here.
UPDATE - 4/24/20: The Paycheck Protection Program & Healthcare Enhancement Act was signed into law, replenishing the PPP with $321 billion in funding and allowing the SBA to resume lending.
UPDATE - 4/16/20: The ongoing rollout of forgivable small business loans under the Small Business Administration's Paycheck Protection Program (PPP) has brought several changes to aspects of the program: from the reactivation of former SBA lenders to the Federal Reserve's decision to buy PPP loans to give lenders more liquidity. Read on for updates to the relevant portion of our original breakdown.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law by President Donald Trump on March 27, 2020, and one of its key provisions aimed at helping small businesses amid the coronavirus (COVID-19) pandemic is the creation of forgivable Paycheck Protection Program (PPP) loans. Small businesses can apply for PPP loans beginning on Friday, April 3, 2020. Here’s what you need to know about the Paycheck Protection Program.
What small businesses are eligible?
- Any small business with less than 500 employees, including private non-profit organizations, some 501(c)(19) veterans organizations, select businesses with fewer than 1,500 employees that meet SBA size standards for their industry, sole proprietors, independent contractors, self-employed individuals, and “gig economy” workers.
- Businesses are only eligible if they were operational as of February 15, 2020.
- Small businesses are eligible to apply starting on April 3rd, while independent contractors & self-employed individuals can do so beginning on April 10th.
How do the loans work?
- PPP loans cover 250% of an employer’s monthly payroll, up to a maximum of $10 million. PPP loans have a 100% federal guarantee, with no collateral or personal guarantee required. (UPDATE: The enactment of the Paycheck Protection Program Flexibility Act gives small businesses more time to use PPP loan amounts on eligible payroll & overhead expenses and receive forgiveness, extending the period from the earlier of 8 weeks after origination or June 30, 2020, to 24 weeks after origination or December 31, 2020, whichever occurs first. Small businesses would be afforded the same timeline as the above for rehiring workers.)
- Loan amounts spent on covered payroll costs & certain overhead expenses during the 8 weeks after the loan’s origination can be forgiven, or December 31, 2020, whichever occurs earlier. Due to likely high participation rates, the Treasury Dept. has advised that no more than 25% of the forgiven amount can be for non-payroll costs. (UPDATE: Following the enactment of the Paycheck Protection Program Flexibility Act, small businesses can use up to 40% of PPP loan amounts for covered overhead expenses and still receive forgiveness.)
- Loan forgiveness amounts are to be reduced proportionally by any reduction in employees retained compared to the prior year, and reduced by the reduction in pay of any employee beyond 25% of their prior year compensation.
- To encourage employers to rehire employees who have already been laid off due to the COVID-19 pandemic, borrowers that rehire workers won’t be penalized for having a reduced payroll at the beginning of the loan period.
- Covered payroll expenses eligible for forgiveness include salary, wages, and cash tips (excluding individual compensation over $100,000 annually); employee group healthcare benefits, including insurance premiums; retirement contributions; and covered family & medical leave.
- Covered overhead expenses include interest payments on any mortgage incurred prior to February 15, 2020, rent payments on a lease in force prior to that date, and utility payments for service which began prior to that date.
- PPP loan amounts that aren’t forgiven after one year will be carried forward as a loan with a maturity of 2 years, an interest rate of 1%, and the 100% federal loan guarantee would remain intact. PPP loan payments can be completely deferred for at least 6 months but no more than one year. (UPDATE: Following the enactment of the Paycheck Protection Program Flexibility Act, borrowers with newly originated PPP loans use a loan maturity period of five years.)
Where can small businesses get PPP loans?
- The Paycheck Protection Program is financed by $350 billion in funding provided under the CARES Act & $321 billion in funding under the Paycheck Protection Program & Health Care Flexibility Act that will be loaned out by federally insured banks, credit unions, and Farm Credit System institutions. (UPDATE: The Federal Reserve has committed to purchasing loans after they're made by banks & credit unions to give the lenders additional liquidity.)
- Existing Small Business Administration (SBA) lenders that participate in its 7(a) loan program are eligible to immediately opt-in to the Paycheck Protection Program & originate loans. There are over 800 existing SBA-certified lending institutions that meet this standard, and all loans will have the same terms regardless of the lender.
- Small businesses apply for the Paycheck Protection Program through a participating lender, and you should consult with your local lender as to whether it’s participating. The SBA has made a sample form available if you wish to see what information will be requested. (UPDATE: The SBA has created a search tool that will allow you to enter your zip code and find a list of eligible Paycheck Protection Program (PPP) lenders near you. Start your search here.)
- Banks, credit unions, and other financial institutions that aren’t certified SBA lenders may be able to participate in the PPP soon, as the SBA & Treasury Dept. are streamlining a process for those lenders to participate in the weeks to come. (UPDATE: As of April 4th, the SBA reactivated the licenses of 30,000 community banks & credit unions that allow them to lend SBA loan products, and participate in the program. If your preferred lender wasn't initially able to participate in the PPP, they may be actively doing so now.)
- Small Business Administration - Paycheck Protection Program
- Small Business Administration - Sample Application Form
- Treasury Dept. - Borrower Information Sheet
- U.S. Chamber of Commerce - Coronavirus Emergency Loan Guide & Checklist
- U.S. Chamber of Commerce - Small Business Guide to the CARES Act
— Eric Revell
(Photo Credit: iStock.com / mangostock)
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